![]() ![]() With a solid grasp of these concepts, you’ll be able to properly structure a transaction and move forward with the deal. We’ll also discuss the remaining layers of the capital stack-senior debt and mezzanine debt-in a future article. With that in mind, we’ll cover this topic in depth in an upcoming article, which will explain how to build your best investor presentation. Given the need for more equity, along with the additional expense it carries in a transaction, it’s important to raise this portion of the capital stack in the right way. Many equity investors out there are ultimately aiming to solve for mid- to high-teens rates of return, which is not all that different than institutional investors. They’ll also usually be looking to benefit from the upside potential too. Depending on the risk profile of the transaction, preferred equity contributors might ask for a single high digit return. Even with rising interest rates, the senior debt for a cash-flowing multifamily property might still be below 6%, whereas equity investors are usually looking for more. ![]() When gathering funds in today’s market, keep in mind that equity is typically more expensive than debt. Many of the transactions today may require 40%, 45%, or even 50% of equity. This can be true even for a cash-flowing asset. As a result, you may be asked to bring more equity to the table than in the past. (Loan to value refers to the loan amount divided by the total value of the property.) However, those figures may now be in the rearview mirror. In previous years, it might have been possible to have a 65% or 70% loan to value in a deal. When building a capital stack, bear in mind that in recent times, the lending environment has grown more challenging. Then the sponsor receives their return, and lastly the promote. Following this, investors receive their preferred return. The sequence is usually that investors get their equity back and then the general partner gets their equity returned. There is typically an order for how preferred equity investors and common equity investors receive their funds and profit share. Given this, you’ll definitely want to consult an attorney on how to approach them and make sure you’re raising money the correct way without violating any of the rules. Most of the time when you’re raising capital, you’ll be interacting with accredited investors by using a private placement. You’ll want to cultivate the relationship and build an audience once you have a deal to present, you’ll have established credibility with them. Some investors gave $25,000 and the higher amounts averaged $100,000.īefore asking for an investment, it’s good practice to begin educating potential investors about the market and your business plan. As Jordan Vogel, co-founder of Benchmark Real Estate Group, mentioned on my podcast, “ The Insider’s Edge to Real Estate Investing,” when raising capital, he and his partner created a list of everyone they knew that they thought could write a $50,000 check. When the general partner seeks preferred equity, one of the first networks to tap is often friends and family. ![]()
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